Major bank sounds alarm on off-the-plan properties

The nation’s largest mortgage lender has warned of serious risks to off-the-plan property investors in two capital cities.

Investors have been told to brace for rising vacancies, reduced rents, falling property values and greater settlement risks in two of the country’s hottest property markets heading into 2016.

A new report from CBA forecasts a difficult road ahead for investors who have purchased off-the-plan apartments in Melbourne and Brisbane, as the two markets struggle to absorb an increased supply of apartment stock.

In the bank’s Commbank Property Insights Summer Edition it warns of extended vacancy periods arising from the high concentrations of apartment stock set to be completed in the coming 24 months – stating that it may be several years before population demand meets the level of supply.

The report echoes recent warnings about the two markets issued by the Reserve Bank of Australia.

According to CBA’s head of property strategy and research, Kevin Stanley, the situation in Melbourne and Brisbane is likely to increase settlement risk and put downward pressure on values.

“Inner Melbourne and inner Brisbane will experience the highest concentration of apartment completions in absolute terms, in the next two years. As a result, these two locations will be subject to rising vacancy and reduced rents, leading to drops in property values and greater settlement risk,” Mr Stanley said.

The bank isolated the top 20 suburbs for apartment completions in 2016, which included the Melbourne CBD and Southbank and the Brisbane suburbs of Newstead, South Brisbane, Woolloongabba, Bowen Hills, West End, Fortitude Valley.

The inner-city Melbourne market has long been the subject of concerns of apartment oversupply, but the news doesn’t bode well for the Brisbane market, which has already disappointed in 2015.

Domain Group chief economist Andrew Wilson recently lamented the lack of movement in the Brisbane market during 2015, stating that a weak state economy was likely to continue dampening price growth into the future.

“Brisbane’s probably been the disappointment this year, and it may be the surprise packet. There was the prospect that Brisbane would clearly be first place behind Melbourne and Sydney for price growth, but it’s just gone nowhere.

“Without a significant pick-up in the economic prospects, particularly of Queensland, there won’t be the revival that many have predicted at that level," he added.

Brisbane-based buyer’s agent Meighan Hetherington explained that investors with existing apartments in the city are already struggling with extended vacancy periods and reduced rentals – with little scope for improvement.

“We’ve got such a strong level of investor activity at the moment I think the most affected market is the unit market, there is quite an oversupply and there’s a lot more to come onto the market. We’re actually going through a lot of analysis on that market at the moment and there isn't an increase in tenants looking for that product – it’s not typically a product that owner-occupiers buy. [It’s an] investor product, the units, but there’s a lot of supply and not a lot of tenants and I think we’re going to see quite long periods of vacancy,” she said.

The news might be grim for Melbourne and Brisbane but, despite recent reports that Sydney’s apartment market is already struggling with increased settlement risk due to revised lending requirements and an oversupply of apartment stock, the CBA report indicates that it is the best placed capital city to cope with an increase in apartment numbers.

“In Sydney, the broader geographic spread of completions across a large number of suburbs, together with a greater depth to the buyer and occupier market, is likely to mitigate these risks,” Mr Stanley said.

The Sydney suburbs with the highest number of estimated apartment completions in 2016 included Mascot, Chippendale, Bondi Junction and Parramatta.